Recent expansion in the U.S. manufacturing sector lost some momentum last month as growth in new orders and employment retreated, but industrial costs jumped, according to data published Thursday.

The Institute for Supply Management said its index of national factory activity moderated to 54.4 in May from 57.3 in April, short of economists' median forecast of 55.5.

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The index has held above 50 — the level separating growth from contraction — for just over three years.

Most economists are looking for the giant U.S. economy to slow this year but many were hoping strength in the industrial sector could pick up the slack from over-indebted consumers.

May's unexpectedly weak reading followed robust data on regional factory sectors, which had sparked speculation among economists of a stronger ISM.

"What really struck me was what's happened to the rate of growth of new orders. We had a deterioration from 61.9 in February down to 53.7 now," said Norbert Ore, head of the ISM's business survey committee. "That would lead us to believe that production is going to slow."

The new orders component, a gauge of future growth, receded to 53.7 from 57.6 in April, while the prices paid index, which measures inflationary pressures within the factory sector, surged to 77.0 from 71.5, the highest since the aftermath of Hurricane Katrina, which hit in late August 2005.

The price gains come at a time when Federal Reserve officials are monitoring economic data for any inkling of price growth as they decide whether to stop raising interest rates.

"This is not going to be enough to sway the Fed off its tightening path," argued Robert Brusca, chief economist at Fact and Opinion Economics in New York.

The factory employment outlook also worsened according to the ISM, with that index falling to 52.9 from 55.8, boding ill for Friday's U.S. payrolls report from the Labor Department.

Wall Street had a muted reaction to the figures, with stock prices edging modestly higher and the bond market turning positive.